Peter Scheller
Berater für Wirtschaftsprüfer, Rechtsanwälte, Steuer- und Unternehmensberater

„Wenn es knifflig wird.“

Foreign source income and German income tax

von Peter Scheller

Foreign source income and German income tax

Foreign source income is in general not subject to German income taxation if a person is not resident in Germany. However, in years where a person enters or leaves Germany this sort of income might affect the progressive German income tax rate on taxable income in Germany. In these cases the tax rate will be calculated on the basis of the world-wide income except the income on capital investments and capital gains of the same. Capital income is taxed at a flat rate of 25% plus a solidarity surplus charge (combined tax rate about 26,375 %).

Foreign source income will have an effect on German income taxation if the following situations arise:

  • The person is subject to German income taxation for part(s) of the calendar year.
  • The person receives income while being a tax resident in Germany which is taxable in Germany.
  • The before mentioned income does not result in an income taxation at the maximum rate (combined tax rate inclusive solidarity surplus charge: 47,48 %)

If the before mentioned applies, foreign source income not being taxable in Germany will increase the German income tax rate. Consequently the tax burden in Germany will  increase.

Example: The US citizen A is living in Germany and works for a German employer. On 1 of July his employer sends him abroad for 24 months on an assignment contract. A gives up his tax residency in Germany and relocates himself to the work destination. A receives a gross salary of € 70,000 for the first half of the year which results in a taxable income of € 50,000 after deductions and allowances. A receives a gross income for the rest of the year of € 90,000. In the second half of the year he has work related expenses such as relocation expenses, costs of telecommunication, travelling costs and working materials of € 20,000. The income tax on an income of € 50,000 for a single person would be € 13,483 (tax rate: 26.97%), but A’s income tax rate will be calculated on the basis of € 120,000 (income taxable in Germany of € 50,000 + foreign source income of € 70,000). The tax rate on € 120,000 is 37.06%. The German income tax is € 18,530 (€ 50,000 * 37.06%). The increase in German income tax of about € 4,000 is caused by the increase of the tax rate.

The example shows the following:

  • Foreign source income which is not taxable in Germany may have a considerable effect on German income tax. This is especially the case if a person moves to Germany or leaves Germany within a calendar year.
  • It also shows that work related costs caused by foreign activities have a decreasing effect on the German income tax rate. If for example A would not declare his work related costs of € 20,000 in his German income tax return the tax rate would be calculated on an income of € 140,000 which would result in a tax rate of 38,10% and an income tax of € 19,053. Through declaring the work related expenses on his foreign activities he reduces his German income tax burden by about € 500.

Notice:

(1) Above mentioned circumstances given, income which is not taxable in Germany has to be declared in the German income tax return.

(2) Expenses related to income which is not taxable in Germany can be deducted and decrease the German income tax rate.

(3) Foreign source income has to be calculated in accordance with German tax regulations. This means that special deductions and allowances can be deducted. A good example would be relocation expenses. Not only direct costs like travelling costs, removal expenses etc. are deductible but also standard amounts for other expenses. These amounts can be deducted without any proof.

(4) Foreign source losses such as those from rental activities may also have a reducing effect on the German income tax rate.

Author: Peter Scheller, German Tax Adviser – Master of International Taxation

Bildquelle: www.fotalia.com

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Einen Kommentar schreiben

Kommentar von stan smith |

If German citizen has children who are usa citizens and all financial assets are in usa and brazil do the children have to pay any German inheritance tax if there are no German financial assets and children reside in the USA?

Antwort von Peter Scheller

It does not matter what citizenship the decendent or his/her hairs are. It only matters if one of before mentioned persons are resident in Germany in the moment of decent.

Kommentar von Prashanth Prasad |

Hi
Is there a possibility of tax refund getting rejected if the amount earned in foreign land is more than the minimum limit. I believe for FY19 it minimum limit was Euro 9000

Antwort von Peter Scheller

You only get a refund, if you paid any taxes in Germany.

Kommentar von Colin Short |

How many years or what is the timeframe that the finanzamt can reclaim tax, some people have told me only back as far as 5 years.

Antwort von Peter Scheller

It depends on various factors. The maximum is 13 years if the tax authorities consider tax fraud. You better ask a expirienced tax adviser in order to avoid risks (taxes, interests, penalties).

Kommentar von Mikhail Shirokov |

Does IRS report a US citizen's income to the Finanzamt in Germany? Or conversely, does the Finanzamt request information on US citizen's filed/(bank or employer reported) income who resides, works and files taxes in Germany?

Antwort von Peter Scheller

Seldom, but it happens.

Kommentar von Colleen Schleife |

I live in Germany with my children but work as a flight attendant out of London England. I am gone 183 days a year. Is my foriegn earned income subject to German taxes?

Kommentar von Colleen Schleife |

Also in 2016 and 2017 Germany taxed me on my foriegn health insurance as freiwillig versicherung, i am currently fighting this. I work for US based airline and am not entitled to German gesetzlich versicherung or Obamacare. In the US any company with over 50 full time employees must provide health insurance for it employees to a minimum standard. Can Germany tax me on this benefit like it is a luxury benefit similiar to a company car?

Antwort von Peter Scheller

You need an expirienced German tax adviser.

Kommentar von Irande Raulio |

I've just recently become a tax resident in Germany but make my income entirely in Ireland from employment there. I currently pay taxes in Ireland but I should really be paying them in Germany.

While this is technically tax evasion, what is the worst thing that can happen if I don't declare any income in Germany? How could the German state find out about my income abroad?

Antwort von Peter Scheller

You only have to pay income tax on the income which is connected to your working time in Germany (physical presence).

If the German tax authorities find it out:

  • Payment of taxes
  • Interests
  • Penalties (can be severe)

Kommentar von PETAR ATANASOV DAMBOVALIEV |

Hi,
I have some US shares and I live in Germany but I'm not a German citizen.
The US does not tax non residents for capital gains. Will I have to pay capital gains tax to Germany for my US shares?

Antwort von Peter Scheller

Kommentar von Sanky |

How much tax do I need to pay If I work whole year outside?

Antwort von Peter Scheller

This depends on various matter (such as tax residence, state of work etc.). You should consult a tax adviser.

Kommentar von AAYUSH |

I worked in poland from jan to march for 2019 and paid all taxes there itself,Now i move to germany on 1st april 1st and i become tax resident of germany, While declaring my income in germany do i need to provide poland income detail also in germany?

Antwort von Peter Scheller

Yes, see https://scheller-international.com/blog-beitraege/foreign-source-income-and-german-income-tax.html

Kommentar von Dorothy |

I’m a US citizen (married to a German), living in Germany and working for a German company, but I’m also an author for a US publishing company. Do I claim my US royalties on the German tax form, and if so, are they then exempt from being taxed in the states through the Foreign Earned Income Exclusion form which I file with my US taxes? Also, would this change if I no longer worked for my German employer?

Antwort von Peter Scheller

The royalties will be taxed in Germany at the regular rate. You have to declare them in your income tax return.

Whether you can use the foreign earned income exclusion has to be discussed with a US tax expert. Otherwise you will be able to credit your German income tax against the US tax.

Whether you work for a German employer or not is irrelevant in this respect.

 

Kommentar von Alex |

I'm a dual US-German citizen living in Germany. I hold stock in the U.S., which I sold, and have to pay U.S. taxes on the capital gains. Apparently, I am required to pay taxes on the capital gains in Germany as well. Is this correct? I thought the tax agreement between the countries was created to avoid double taxation.

Antwort von Peter Scheller

Double Taxation Treaties not always avoid double taxatio scenarios.

However, in you case it looks to me that the German tax on capital gains can be credited against the US tax. I think you need the Support of a professional US tax expert.

Kommentar von Stefano |

I have lived in the US half of the year and have I received income (US employer) for which I have already paid taxes in the US. Now I moved to Germany and live here. Do I need to pay taxes in Germany for the US income?

Antwort von Peter Scheller

Not, if you were not tax resident in Germany while receiving the income. However, you have to declare it on your German income tax return because it has an influence on your German tax rate.

Kommentar von Khanna |

I was on deputation in Germany for 7 months, where my home + German salary was paid & taxed. Am I to declare the rest 5 month's home salary as foreign income ?

Antwort von Peter Scheller

Yes, Just read the article.

Kommentar von Ritesh |

Hello, I moved to Germany from India for Job purposes in February. I started my work in Germany since February before which i was working in India for the month of January. As I spent 11 months of 2019 in Germany, i am a tax resident in Germany. While declaring taxes, do I habe declare income from India for month of Jan?

Antwort von Peter Scheller

Yes. Just read the article.

Kommentar von Aera |

Hi, I'm residing and working in Germany. Also my wife residing and working in Germany. We both have been paying Lohnsteuer and filed tax declarations for last 3 years. We are not German citizens yer and from India. Now my wife is in negotiations with an Irish employer who is offering home office due to covid 19 meaning her physical presence is in Germany but receiving salary and paying taxes in Ireland. Would she have any obligation to German tax authorities? Also would I have any obligation on her behalf as I would continue to be in Germany for work and paying taxes accordingly as normal.

Antwort von Peter Scheller

Your wife has to pay taxes in Germany because she works physically in Germany. That her employer is situated abroad and the salary is paid there is irrelevant. She has to file income tax returns in Germany.

Kommentar von Lee Macey |

I have been living in Germany since December 2017. I have accepted a transfer to Dubai which will take effect in the next six weeks.

If I do an Abmeldung and completely leave Germany prior to starting my new job as a Dubai resident, will the Finanzamt still want details of my Dubai earnings for the October-December period of this current tax year?

And if I don't Abmeldung and keep an address in Germany, what happens then? I will be a resident of Dubai, but have also been in Germany more than 182 days over the last three years.

How does tax on foreign earned income differ to the rates and insurances collected at source when working normally in Germany?

Antwort von Peter Scheller

1) If you give up resicency in Germany the income October - December will not be taxed in Germany but will have an effect on you German income tax rate. Therefore it has to be declared in your 2020 income tax return.

2) If you keep you residency in Germany you have to tax your entire world wide income in Germany. Foreign tax might be credited against the German tax (as far as I know there is no income tax in Dubai).

3) How your German income tax will be affected by foreign source income requires a full analysis of you tax situation.

Kommentar von Lydia |

Hello, I am a German citizen currently living in the UK and earning all my income in the UK. With my employer's new home office policies I am considering buying a property back in Germany to live in for part of the year (less than 6 months in any given tax year). I will still be considered a UK resident and taxed in the UK, but I want to understand if I will be considered a German tax resident as well due to the ownership of the property - will I be double taxed due to the owned domicile in Germany?

Antwort von Peter Scheller

How the property in Germany will affected dpends on a lot of factors (source and type of income, main residence etc.). You need a professional adviser.

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